Market Woes Put Developers on Hold

MTThe Federation Tower, in the Moskva-City development being built by Mirax Group, will be Europe's tallest building.
The collapse of the Russian stock markets is beginning to take a toll on the country's real estate developers, many of whom have announced freezes on new and ongoing projects over the next year.

Stroimontazh, a St. Petersburg-based developer controlled by Artur Kirilenko, announced Thursday that it was freezing all new projects for a year. The developer said it was following in the footsteps of Mirax Group, controlled by Sergei Polonsky, which made a similar announcement Wednesday.

The builder said its freeze was not new, however, and that "for more than a year — since the start of the mortgage crisis in the United States — we haven't taken on any new projects," RIA-Novosti reported, citing the statement.

"Whenever there's a financial crisis, it becomes difficult to attract capital," said Oleg Repchenko, general director of analysis firm IRN. "But in this case, the problem is technical. It's not one of those ridiculous issues when the building cost is lower than the sale price."

The current financial situation will likely interfere with other developers' plans, Repchenko said, although it should not cause any long-term problems for them. "Some companies may have to sell off some assets, and others will likely stop construction on some projects — but developers will live through this," he said.

Two of the country's other big construction firms — Sistema-Hals, part of billionaire Vladimir Yevtusheknov's Sistema holding company and Inteko, controlled by Yelena Baturina, Mayor Yury Luzhkov's wife — have also had to make changes in their development plans, Kommersant reported Thursday.

Fitch ratings said Thursday that the conditions in Russia presented growing liquidity concerns, "particularly in the real estate and construction sectors."

If banks begin to withdraw lending, property values will fall because of forced selling, Fitch said in a statement. "Furthermore, where existing debt financing is asset-specific and near-term refinancing is not achieved, many banks can quickly enforce their security," it said.

Polonsky told reporters Wednesday that Mirax planned to continue work on all projects where construction was already under way and on those that have already been announced, but that they would only seek out new construction sites when the market stabilizes.

"In the next year, we don't plan to take out a single kopek of credit — the corporation's funds will hold out for the realization of our activities," Polonsky said in comments confirmed by the company's press office.

Sistema-Hals is planning to sell nearly one-quarter of its development assets to shore up accounts and repay debts, which currently total $1.2 billion, or 34 percent of the value of their development portfolio, Kommersant reported Wednesday, citing investment bankers with knowledge of the matter.

"A reconstruction of our portfolio is currently underway in the company, due to liquidation of low-yielding projects where the [internal rate of return] does not exceed 20 percent," Anna Zavyalova, spokeswoman for Sistema-Hals, told Kommersant.

A spokesperson for Sistema-Hals could not confirm Zavyalova's comments Thursday but said that more-detailed information would be released Friday. Calls to Inteko and Stroimontazh went unanswered Thursday.